Thoughts for Monday, March 19...

The markets began a correction during the week of February 21. This downward movement retraced a portion of the rally that began in July of 2006 and continued into the new year. On March 5, the market began a period sideways that appears to be near completion.



The chart above shows that this sideways movement has assumed a fairly standard three-wave corrective formation. The fact that this corrective formation retraced roughly 38% of the downdraft from around February 21 until March 5 adds to our ability to characterize this as a flat wave structure. We will probably see additional upward movement as this pattern completes. It seems unlikely that the S&P 500 will move much higher than resistance at 1407.43, though the next area of resistance would be at 1417.23.

Once this sideways corrective formation completes itself, the S&P 500 will experience another thrust down. This movement will probably complete during the week of March 26. That would give us a significant low at week 76 of the time cycle that began back in October of 2005. As discussed previously, the support for this downward movement will be around 1370 and 1340.

I would like to reiterate that I do not believe this is the beginning of a new bear market. I believe that this is a corrective period of rather high degree, and will probably continue into June. It seems probable that all movement between now and June will be confined between 1340 and 1460. Once the S&P 500 reaches its low next week, we will probably see some more significant upward movement. At some point, I would then expect to see at least one more wave downward to test significant support levels before this structure completes in June.

Thoughts for Sunday, March 11...

This chart illustrates the divergences that began to form as the S&P 500 rallied into the new year. As prices continued their trend higher, momentum oscillators failed to confirm the new highs and volume began to taper. I think it is also important to note that there has been no significant upsurge in volume to confirm the recent correction.

If the current correction is merely a retracement of the rally from July 2006 to February 2007, then we would expect the S&P 500 to retrace either 38% or 50% of this 242.28 point rally. Such retracements would take the S&P 500 to 1369.02 or 1340.43. A 62% retracement would take this index below its May 2006 high of 1326.70. This would suggest that a more significant correction was taking place.

The fact that the S&P 500 failed to reach the 38% retracement level suggests that further movement awaits to the downside. In the mean time, it is helpful to know how far the current bounce should go. The S&P 500 declined 87.60 points from the February 22 high to the March 5 low. The significant resistance levels for a correction of such movement would be at 1407.43, 1417.23, and 1428.11. You might note that the 38% retracement level at 1407.43 was tested on both March 8 and 9, only to see prices fall back below that level.